U.S. dollar slips amid uncertainty over when the conflict in Iran could end

A rally in the U.S. dollar paused on Tuesday, as investors assessed hopes that the joint U.S.-Israeli assault on Iran could soon come to an end.

The Dollar Index, which tracks the greenback against a basket of six major world currencies, was last down 0.3% to 98.91 at 15:47 ET (19:47 GMT). 

President Donald Trump has suggested that the war in Iran, which has now raged on for more than a week, is expected to conclude "very soon." However, Trump flagged that further fighting will be necessary should Iran move to block shipments through the Strait of Hormuz, a vital waterway south of Iran through which a fifth of the world’s oil flows.

The conflict shows no signs of slowing down, with the U.S. on Tuesday hitting Iran with its heaviest air strikes yet.

Fears of prolonged disruptions in the Strait of Hormuz, and a subsequent spike in inflationary pressures around the world, fueled a strengthening in the U.S. dollar in recent days.

Although Iran’s leadership reportedly said that it would not allow "one liter of oil" to pass through the chokepoint should the U.S. and Israel carry on their strikes, traders have appeared to be buoyed by Trump’s comments.

"After a very shaky start, Monday proved to be a day of reversal for risk assets as President Trump hinted that military operations could end soon," analysts at ING including Chris Turner and Francesco Pesole said in a note. "No one knows whether that will be the case, but Monday’s events show that the US administration is more sensitive to energy than it seemed."

However, they added that oil supplies -- which have been largely marooned on around the Strait of Hormuz or diverted away from the region -- would need to start flowing through the bottleneck once again for "this dollar reversal to extend."

Elsewhere, EUR/USD was down 0.2% to 1.1609, while GBP/USD fell 0.1% to 1.3414.

Japanese yen steady

In Asia, the Japanese yen’s USD/JPY pair with the greenback inched up 0.2% to 158.07, with the currency remaining under pressure from dollar strength and uncertainty over the energy disruptions hurting the Japanese economy. Japan is a major importer of oil supplies which pass through the Strait of Hormuz.

Revised gross domestic product data for the fourth quarter showed Japan’s economy grew much more than initially expected, aided by strong capital expenditures and steady consumer spending. 

The print highlighted some resilience in Japan’s economy, although it also showed exports remaining under pressure. Private spending growth was also revised higher but remained in line with the historical average of around 0.3% quarterly. 

Still, resilience in the economy gives the Bank of Japan more headroom to raise interest rates, although the central bank is unlikely to act amid heightened market uncertainty.